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Divorce and taxes

One of the aspects of a divorce that is often contentious involves the division of assets. In community property states such as Washington, assets acquired during a marriage are divided equally between divorcing spouses. In other states, though, the distribution of property is based on what is considered to be fair in the eyes of the courts. Either way, a high asset divorce can present significant tax issues.

Generally speaking, assets can be divided between the parties without additional federal taxes being exacted. As the asset transfer is made, the recipient inherits its tax basis as well as its holding period. Thus, in an example of a spouse being awarded shares of stock, there will be no tax owed upon their receipt, but future capital gain taxes will be calculated using the original cost of the shares and measured from the date of their initial acquisition. As the recipient could potentially be liable in the future for sizable capital gains taxes, this is often taken into account in negotiating property division agreements.

Non-capital gain property now also gets the same treatment, which is a departure from previous Internal Revenue Service policy. Accordingly, assets such as stock options can be transferred with no immediate consequences to either party. Different rules, however, apply to certain tax-free or tax-advantaged retirement accounts.

Any divorce brings up issues that must be dealt with. High asset divorces often require special handling as various asset allocations translate into different degrees of future taxation. Those facing a divorce where significant assets are involved may want to consider discussing these issues with an attorney who has experience in divorce and family law matters.

Source: Market Watch, "What’s even worse than divorce? The taxes", Bill Bischoff, December 03, 2013

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